How Much Funding Do State and Local Governments Receive from Federal Government?
Each year, the federal government provides significant funding to state and local governments. Those funds are used to maintain programs and services such as healthcare, income security, education, and infrastructure. Over the last two decades, 17 percent of federal outlays go to state and local governments in the form of grants, thereby adding to states revenues. Here, we look at why the federal government provides funding to state and local governments and how that funding has changed over time.
Why Does the Federal Government Give Grants to State and Local Governments?
The federal government provides funding for a variety of programs, services, and projects that may be better administered at lower levels of government by officials who are more familiar with unique local needs. For example, Title I education grants provide funding to local education agencies to help ensure that children from low-income families are able to meet state education standards. Local officials can then allocate those funds for programs that are tailored to local needs, such as extra instruction for reading or establishing after-school and summer programs.
According to Pew Research Center, on average, 36 percent of states’ revenues come from federal grants. Grants are also made to ensure that state and local authorities execute federal priorities. For example, the Infrastructure Investment and Jobs Act of 2021 establishes the Safe Streets and Roads for All (SS4A) program with $5 billion in appropriated funds over five years. SS4A provides funding for regional and local infrastructure projects that align with the Department of Transportation’s National Roadway Safety Strategy. The strategy aims to eliminate roadway fatalities over the long term by improving the country’s highways, roads, and streets. Because many roadways are maintained by regional and local authorities, the federal government incentivizes them to complete infrastructure projects that are aligned with the strategy.
The Focus of Federal Funding Has Changed Over Time
Historically, the largest share of federal support to states has been for income security and transportation. From roughly 1940 to 1970, the largest federal grant programs were for family support payments and highways. Since 1989, however, healthcare spending has far exceeded any other category of federal grants to states, with payments to states for Medicaid being the largest program.
Federal grants to state and local governments totaled $1.1 trillion, or 17 percent of all federal outlays, in 2024. Medicaid accounted for $618 billion of this total.
Federal Grants to State and Local Governments Have Increased
The share of total revenues that come from federal grants has steadily increased over the last three decades according to data compiled by the Urban Institute. In 1982, federal grants accounted for $5.2 billion, or 16 percent, of the average state’s revenues when adjusted for inflation. Grants jumped to $20.2 billion in 2020 due to spending related to the pandemic; federal grants to the average state increased to $24.7 billion, or 27 percent, of the average state’s total revenues in 2022. Federal grants to state and local governments also increased as a share of total federal outlays over the same period, from 12 percent in 1982 to 17 percent in 2022.
What Caused Federal Grants to State and Local Governments to Increase?
As noted, for the past several years, most growth in federal grants to state and local governments has been for health programs — mostly Medicaid. From 2014 to 2024, grants for healthcare programs increased from 1.8 percent of gross domestic product to 2.3 percent of GDP. In 2025, the federal government will pay between 50 and 77 percent of total program spending in each state.
Increasing Medicaid spending is attributable to the expansion of program eligibility under the Affordable Care Act and the rising cost of healthcare in relation to other measures of inflation. Additionally, in response to the COVID-19 pandemic, lawmakers enacted enhanced Medicaid funding to keep people enrolled in the program during the public health emergency.
Grants to state and local governments for income security programs also increased sharply in response to the pandemic. Spending for the Emergency Rental Assistance Program accounted for one of the largest increases in that budget category. Over the course of the pandemic, support for the program totaled $46 billion. Other significant increases in spending covered child nutrition programs, and payments to states for childcare and development block grants. Pandemic-related grants were temporary in nature and as these programs have expired, grants for income security declined in 2023.
Conclusion
States rely on the federal government for a significant portion of their total annual revenues, which are typically used for healthcare, income security, education, and infrastructure. Without that federal assistance, states would likely be unable to deliver the same level of programs that provide access to healthcare, support children and families, and promote economic activity. At the same time, spending on grants to states for Medicaid has increased significantly, reflecting Medicaid’s expansion and rising healthcare costs. Given that funding to state and local governments totals approximately one-fifth of all federal spending, it is critical to examine that fiscal relationship in the context of the United States’ fiscal challenges in order to better understand the drivers of the national debt and seek ways to improve the structural imbalance between spending and revenues.
Photo by Thomas Kurmeier/Getty Images
Further Reading
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